Banks, bankruptcy, small businesses

Bill Sims Contributing columnist

Bill Sims Contributing columnist

Small town small businesses, will they be able to survive? The grim reaper has been casting his long shadow over small businesses during these troubled times and as COVID-19 cases continue to rise, so are the cases of failing small businesses. They simply cannot endure the revenue losses against their financial obligations. Big companies? No problem. They can sell stocks, issue bonds and leverage their credit relationships with banks. Small businesses that account for almost 50 percent of private sector employment aren’t so fortunate.

Could things get worse? Three pieces of news this week suggest that they might. First, the U.S. Commerce Department reported that first quarter 2020 U.S. gross domestic product (GDP) dropped 5 percent, the sharpest drop since the last quarter of 2008 of that Great Recession. Yet according to the Associated Press, “Economists now believe that the GDP plunged around 30 percent from April through the end of last month when the virus had its biggest impact.

Second, the Federal Reserve made a recent decision to cap bank dividends and ban share buybacks by large U.S. banks, so that they can preserve capital… just in case.

Third, many big national banks have announced they are stopping applications for home equity loans. Others are only providing them to customers with high credit ratings, again, to preserve capital… just in case.

Unemployment financial help from the CARES Act is set to expire July 31 and currently it doesn’t look like that is likely to be extended.

No wonder small businesses are feeling the shadow of the Grim Reaper, and this after a rough start to the government’s Paycheck Protection Program (PPP). The New York Times reported that “more than 40 percent of the nation’s 30 million small businesses could close permanently in the next six months because of the coronavirus pandemic. That’s according to a poll by none other than the U.S. Chamber of Commerce.

The Small Business Administration is offering COVID-19 “injury” loans, but at a current interest rate of 3.75 percent. Bankruptcy? As a strategy for recovery, filing for bankruptcy protection is not an easy option. It can be an extended and expensive process, although some new rules (sub-chapter 5) kicked in in February that may help.

There’s further news for banks that could affect small businesses and the economy. The financial crisis that hammered the economy in 2008 was all about packaged home mortgages, and what were known as collateralized debt obligations (CDO), where mortgages of varying sub-prime risks were packaged together. When the housing market tumbled, banks failed and the federal government had to step in, with great controversy, to save “too-big-to-fail” banks.

Banks were forced by law to stop the CDOs. Instead banks have now created CLOs. These are not mortgage-related but are bundled small business loans to the very small businesses struggling to survive. Frank Partnoy, a law professor at the University of California Berkeley, and former bank executive, has estimated that there are more than $1 trillion worth of these high-risk bundled business loans currently outstanding, not sufficiently offset by a mix of secure loans. Could 2008 happen all over again on top of the other effects of the pandemic? He thinks the risks are high.

One of the beauties and strengths of Hillsboro is the rich presentation of small businesses. Fortunately, so far, Hillsboro has been spared the worst of the pandemic. But as cases have risen in Ohio, it’s worth noting that one of the major hotspots is centered on the five counties surrounding Cincinnati and Dayton. That’s uncomfortably close. Until we solve medically the coronavirus, we can’t solve the difficulties for small businesses.

But what we can do to help in places like Hillsboro, Leesburg, Greenfield, Lynchburg, etc. whenever possible, is to make a concerted effort to shop and requisition services locally. By doing this, we can make a difference in sustaining our community’s precious small businesses.

And we of all ages still need to be vigilant and careful in our virus practices for the sake of these businesses, and for the sake of our families, and especially our seniors.

Bill Sims is a Hillsboro resident, an author, and runs a small farm in Berrysville with his wife. He is a former educator, executive and foundation president.

Bill Sims Contributing columnist Sims Contributing columnist